Muccio v. Hunt

Citation2014 Ark. 35
Decision Date30 January 2014
Docket NumberNo. CV-11-1273,CV-11-1273
PartiesTOM MUCCIO; MIKE MUCCIO; AND NEXT CHAPTER RESOURCES, LLC APPELLANTS v. JOHNELLE HUNT; PHIL PHILLIPS; MIKE LAX; TOMMY VAUGHAN; WALTER SMILEY; MICHAEL JOHNSON; AMY SORRELL; DAVID SCHUMACHER; TREY TRUMBO; J.B. HUNT, LLC; JOHNELLE HUNT, LLC; PHIL AND JUDY PHILLIPS FAMILY LIMITED PARTNERSHIP, LLLP; TCH INVESTMENTS, LLC; BIG HORN LODGE FINANCING, LLC; BIOBASED HOLDINGS, LLC; SMILEY INVESTMENT COMPANY; LAX, VAUGHAN, FORTSON, MCKENZIE & ROWE, P.A.; HOMESTEAD HOMES, LLC; AND NEXT GENERATION HOLDINGS, LLC APPELLEES
CourtSupreme Court of Arkansas

APPEAL FROM THE WASHINGTON

COUNTY CIRCUIT COURT

[NO. CV-2010-1040-6]

HONORABLE MARK LINDSAY,

JUDGE

REVERSED AND REMANDED.

JOSEPHINE LINKER HART, Associate Justice

Following the bankruptcy of BioBased Technologies, LLC, members of this bankrupt limited liability corporation, Tom Muccio, Mike Muccio, and Next Chapter Resources, LLC, brought a cause of action against other members, the lawyers of members, and the managers of the corporation. These claims included fraud, breach of duty to disclose company information, conversion of membership interest, civil conspiracy, and breach of contract. Thecircuit court dispensed with the appellees' claims by granting summary judgment on claims, dismissing claims, and finding that claims were barred by res judicata and collateral estoppel.

On appeal, appellants raise four issues. First, appellants assert that the circuit court erred in granting summary judgment on their claims for fraud, breach of duty to disclose company information, conversion, and breach of contract after the court found that the claims were derivative actions on behalf of BioBased rather than claims for injuries in their individual capacities and, therefore, appellants did not have standing to sue. Second, appellants argue that the circuit court erred in granting summary judgment on their fraud claim against Walter Smiley and Smiley Investment Company (SIC) on the basis that appellants "failed to meet proof with proof to show that Smiley or SIC made false representations of fact." Third, appellants contend that the circuit court erred in dismissing claims for lack of subject-matter jurisdiction. Fourth, appellants assert that the circuit court erred in concluding that claims were barred by res judicata or collateral estoppel. We reverse and remand the circuit court's decisions as more fully discussed below.1

I. Facts as Alleged in Appellants' Third Amended Complaint

The operative complaint in this cause of action is appellants' third amended complaint, and we set out appellants' allegations as they pertain to the parties and claims before us on appeal. Appellants alleged that their lawsuit arose from "wrongful behavior" relating to BioBased Technologies, LLC, and its predecessors, BioBased Chemicals, LLC, BioBased Insulation, LLC, and Biobased Systems, LLC (collectively, "BioBased"). J.B. Hunt and Tom Muccio partnered to form BioBased, with the understanding that J.B. Hunt would contribute capital, while Tom Muccio would primarily contribute his time and expertise. Capital contributions, with the help of lawyers Mike Lax and Tommy Vaughan, were classified as debt "to gain control" of BioBased. When J.B. Hunt died, Johnelle Hunt inherited his interest. Appellants alleged that they owned 41.81% of BioBased, while 56.19 % of the remainder was either owned or controlled by Johnelle Hunt.

Appellants alleged that in late September 2008, Tom Muccio, as CEO of BioBased, agreed to bring in Smiley and Smiley's company, SIC, as a business consultant upon the recommendation of Lax, who was Johnelle Hunt's attorney. Appellants further alleged that "[t]hough they represented Smiley would be neutral and objective and would make recommendations consistent with the best interests of BioBased, this was a boldfaced lie," and that Smiley came to BioBased as part of a larger overall conspiracy that included Johnelle Hunt, Lax, Vaughan, and Smiley, to "run off" Tom and take control of BioBased. Appellantsalleged that by December 2008, Smiley had become chairman of the board, and by early 2009, had replaced Tom as CEO. Further, BioBased's sales fell off, and an operating line of credit with a bank was not renewed because Johnelle Hunt refused to execute loan documents to accomplish an extension despite her earlier agreement to do so. Consequently, the bank called its note, causing approximately $178,000 worth of checks to bounce in early June 2009.

At a meeting held August 14, 2009, Smiley told the members that BioBased's checks were likely to bounce if the company did not file for bankruptcy, even though it was not mentioned that sometime earlier, Amy Sorrell, as BioBased's acting CFO, had moved a significant amount of cash from the line-of-credit bank to another bank. The calling of the line-of-credit note was then used as a reason for recommending that BioBased file for bankruptcy, even though the bank had been ready and willing to extend its note beyond the August 31, 2009 maturity date. Based on representations made by Smiley at the August 14, 2009 meeting, appellants voted in favor of having BioBased file for Chapter 11 bankruptcy.

The resolution authorizing the company to file for bankruptcy "promised each of the members a voice in the reorganization process." Appellants, however, alleged that they were denied any real opportunity to participate in the formation of a plan, while Johnelle Hunt and her attorneys, Lax and Vaughan, were "given every advantage" by CEO Smiley, CFO Sorrell, and Michael Johnson, who was the chief legal officer for BioBased. The three, as BioBased's management, "secretly negotiated with Lax and Vaughan to create the offer upon which the plan was ultimately based," and management essentially prevented appellants from "making a competing offer" and "withheld company documents" from appellants while providingthem to Johnelle Hunt, Lax, and Vaughan. As a result, Johnelle Hunt, through BioBased Holdings, LLC ("Holdings"), was able to make an offer, while management discouraged other potential investors, giving Hunt a "virtual exclusive option to purchase BioBased." Appellants alleged that BioBased's assets were intentionally undervalued to facilitate the takeover at the lowest possible price.

The complaint alleged numerous claims. In pertinent part, the complaint alleged fraud by Lax, Vaughan, Smiley, and SIC; breach of duty to disclose company information by Smiley, SIC, Sorrell, and Johnson; conversion of membership interest by Smiley, SIC, Lax, Vaughan, and Holdings; civil conspiracy by Lax, Vaughan, Smiley, SIC, Sorrell, and Johnson; and breach of contract by J.B. Hunt, LLC, and TCH Investments, LLC (TCH).

II. The Circuit Court's Order

We set out the circuit court's findings as they pertain to the parties and claims before us on appeal. The circuit court found that Lax, Vaughan, and their law firm, Vaughan, Fortson, McKenzie & Rowe, P.A., were not entitled to summary judgment on the conspiracy claim and that appellants had met their burden of showing that there remained material facts to be decided on their fraud claim as to Lax and Vaughan. Nevertheless, the court concluded that they were entitled to summary judgment on all claims because there was "no genuine issue of material fact and such claims [were] derivative in nature and [appellants] lack standing to assert them." The court further found that these same parties were entitled to summary judgment because there was "no genuine issue of material fact and such claims were barred by res judicata and collateral estoppel."

The court also found that Smiley, SIC, Sorrell, and Johnson were entitled to summary judgment "on the basis that there [was] no genuine issue of material fact and such claims [were] derivative in nature and [appellants] lack standing to assert them." These parties were also entitled to summary judgment "on the additional basis that there [was] no genuine issue of material fact and such claims [were] barred by res judicata and collateral estoppel." The court further found that Smiley and SIC were entitled to summary judgment on the fraud claim because there were "no genuine issues of material fact," and additionally, appellants "failed to meet proof with proof to show that Smiley or SIC made false representations of fact."

The circuit court further denied the motion for summary judgment filed by J.B. Hunt, LLC, TCH, and Holdings, as a party to the claim for conversion-of-membership interest, because the motion, which incorporated the motions for summary judgment filed by the other defendants, was untimely. The court, however, stated that pursuant to Arkansas Rule of Civil Procedure 12(h)(3), all of appellants' claims against them were dismissed with prejudice for lack of subject-matter jurisdiction.2

III. First Issue on Appeal: Lack of Standing

Appellants argue that the circuit court erred in finding that their claims for (1) fraud by Lax, Vaughan, Smiley, and SIC; (2) breach of duty to disclose company information bySmiley, SIC, Sorrell, and Johnson; (3) conversion of membership interest3 by Smiley, SIC, Lax, and Vaughan, and Holdings; and (4) breach of contract by J.B. Hunt, LLC, and TCH, were derivative claims on behalf of BioBased that appellants lacked standing to bring, rather than direct claims for injuries in their individual capacities, which they could properly bring. In their briefs, appellees contend that appellants' claims are derivative because appellants are suing for the injury sustained when they were deprived of their membership interest in BioBased, and that the bankruptcy deprived all members of BioBased of their membership interests in BioBased.

We are guided by our standard on reviewing an award of summary judgment. A motion for summary judgment should be granted when, in light of the pleadings and other documents before the circuit court, there is no genuine issue of material fact and the moving party is entitled to a judgment as...

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4 cases
  • Chandler v. Martin
    • United States
    • Arkansas Supreme Court
    • May 14, 2014
    ...Miller Cnty. Cir. Ct., 2010 Ark. 119, 361 S.W.3d 809; Foremost Ins. Co. v. Miller Cnty. Cir. Ct., 2010 Ark. 116, 361 S.W.3d 805; Muccio v. Hunt, 2014 Ark. 35. Furthermore, even if the parties had raised this argument to the circuit court, any “[a]rguments made below but not argued on appeal......
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  • Green v. Blake
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    • U.S. District Court — District of Kansas
    • August 12, 2019
    ...by each plaintiff in the "different, discrete amount" of their respectively induced investments); Muccio v. Hunt , No. CV-11-1273, 2014 Ark. 35, 2014 WL 346929, at *5 (Ark. Jan. 30, 2014) ("If a plaintiff alleges fraud in the inducement to enter into a partnership agreement, then the claim ......
1 books & journal articles
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    • United States
    • James Publishing Practical Law Books The Limited Liability Company - Volume 1-2 Volume 1
    • April 1, 2022
    ...arise from a direct harm and special injury or (2) there is a separate duty owed by the defendant to the plaintiff. Muccio v. Hunt, 2014 Ark. 35 (Ark. 2014) . The Arkansas Supreme Court found that claims of fraud, breach of fiduciary duties and conversion were direct rather than derivative ......

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